• A Fourth Monetary Policy Tool

    Feb 15 • Thinking Economically • 259 Views

    The chasm between economics textbooks and real life has grown larger. It is just tough to keep up.

    Looking at monetary policy, the most typical tool used by the Federal Reserve takes students so very logically to the Federal Open Market Committee (FOMC). If the FOMC sells securities, they will sink the economy; buying securities buoys the economy. Easy to remember: sell/sink; buy/buoy.

    How? When securities are bought, the Fed injects money into the banking system. The Fed gets the securities and the bank gets the money. The result? More excess reserves, more to lend, lower interest rates. For selling securities, the opposite happens. The banks get the securities and the Fed gets the money. Then, banks have less to lend and theoretically, interest rates rise.

    Now though, concerned about avoiding inflation but continuing the recovery, Dr. Bernanke says that the Fed will take advantage of a new tool. During October, 2008, the Congress empowered the Fed to pay banks interest on reserves the banks are required to leave with the Fed. Consequently, banks could find it beneficial to hold on to reserves rather than lending them. The result? Fewer dollars chasing goods and restraining inflation.

    The Economic Life
    Created in 1913, the Federal Reserve is an independent government agency. In charge of monetary policy, traditionally, the Fed has overseen the supply of money and credit in the economy in three basic ways:
    1) Discount Rate: by raising or lowering the interest rate it charges banks when they borrow money from it.
    2) Open Market Operations: by buying and selling government securities the Fed targets the federal funds rate (the rate banks charge each other)
    3) Reserve Requirement: by changing the amount that banks are required to keep in reserve

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    Recycling Garbage

    Feb 14 • Thinking Economically • 217 Views

    A recent article in SF Gate focused on Berkeley’s garbage problems. Because of Berkeley’s commitment to recycling, the revenue it receives from garbage collection has dropped precitously. Less garbage means more job and service cuts.
    If people everywhere are recycling and composting, and if cities like Washington, D.C. are charging bag taxes, what is the cost? How are time, money, and jobs affected? Berkeley’s recylers take us to a much larger issue. They return us to opportunity cost and free lunches.

    The Economic Life
    Any decision we make has an opportunity cost. Any time we decide to do one thing, we sacrifice the next desirable alternative.

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  • The Debate Between Equality and Efficiency

    Feb 13 • Thinking Economically • 173 Views

    Speaking about the current political climate in “The Populism Problem”, James Surowiecki, New Yorker columnist, cites our contradictions:

    • Solve unemployment but cut the deficit
    • Implement health care reform but limit government
    • Help your society but protect yourself

    Surowiecki’s comments reminded me of Arthur Okun’s Equality and Efficiency: The Big Tradeoff (Brookings, 1975). Always, we have demonstrated a tension between our democratic heritage and our economic aspirations. Equality implies a smaller economic pie. With efficiency we get the bigger pie but also greater individual wealth and power.


    The Economic Life
    The Okun tradeoff is reminiscent of the debate between Alexander Hamilton and Thomas Jefferson. Willing to accept the cost, Hamilton’s priority was stimulating business and industry. Indeed, we could call Hamilton the father of our economy. Jefferson, by contrast worried more about democracy and the virtue of the “yeoman” farmer.

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  • Blanket Competition

    Feb 12 • Thinking Economically • 259 Views

    Hearing that American Airlines was charging eight dollars for a blanket and pillow brought back memories of airline deregulation, Eastern Airlines, and People Express.

    Does anyone remember the Eastern Shuttle? With a government given monopoly on flights between LaGuardia and Washington, D.C., Eastern guaranteed fliers a seat on every flight. You could arrive at the airport with minutes to spare and know that Eastern would roll out a new plane if the scheduled flight was full. Because fares corresponded to costs, Eastern made money.

    In 1978 everything changed. With government no longer mandating interstate routes, competition surfaced and all airlines, including Eastern, had to change their behavior. Suddenly, someone else (New York Air) was charging a lower fare and advertising. They had to respond.
    Charging lower fares meant consumer choice. You could fly more expensively or take the “no frills” airline (People Express) and pay extra for everything, even food.

    Smiling, commentators are predicting what might be next.

    The Economic Life
    The market structure in which a firm competes shapes its behavior. As a monopoly, firms are price makers. They have considerable control over how to generate profits. At the other end of the competition continuum, perfectly competitive firms such as wheat farmers have their prices established through demand and supply in the marketplace. They have little power. With deregulation, the power of firms such as Eastern Airlines changed considerably.

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  • Random Snow Stories

    Feb 11 • Thinking Economically • 181 Views

    Property rights
    When you shovel a parking space, does it remain yours when you pull out? In Boston, if you shovel out your car during a snow emergency, the space is yours for at least two days. Just “reserve” it with a lawn chair or trash can. 

    Fiscal policy
    -Federal employees will be paid for snow days. The total? Close to $100 million a day.
    -Snow removal costs are exceeding all estimates. Virginia is beyond its $104 allocation. Philadelphia’s Mayor Nutter just said “We’ll figure out budget issues later.” Weeks ago, a Wisconsin town clerk said they would only plow curves, intersections, and hills.

    The headline said, “Robot Snowplow from Japan Eats Up Snow, Poops Out Bricks.” The snow bricks are then deposited in a river

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